Unlike starting a new business, taking over an existing business comes with many advantages. For one thing, the buyer usually acquires a thriving business with a good reputation. And the seller is pleased to have found a successor. However, before a prospective buyer decides to make the purchase, there are a few things that should be checked.
1. Location
Location, location, location: That’s the key criterion for all types of real estate when it comes to value. With commercial real estate in particular, it’s important to determine whether transportation access is good, whether there’s a steady flow of walk-in customers, and whether there’s already competition nearby. If the business operates primarily online, it must be easy to find online. A location analysis helps identify opportunities and risks. But you should also form your own detailed impression: First and foremost, the surroundings must suit you; otherwise, you won’t be happy and won’t be able to serve your customers well as a seller after a potential business takeover.
2. The Company’s Reputation
Good products, capable employees, attractive facilities—and yet the reputation is lackluster. You should therefore urgently find out how the small-to-medium-sized business you’re planning to buy is viewed. It’s worth asking regular customers, local residents, and suppliers. It’s also advisable to check out review sites. If experts are critical, you should give it some serious thought. After all, it takes a lot of time and dedication to restore a company’s tarnished reputation.
3. Future Viability of the Business Model
Some companies that have long been successful in the market suddenly disappear without a trace. Disruptive players—such as Airbnb in the hotel market—have shattered their business models. You should therefore ask yourself why the current owner wants to sell the company and is addressing the issue of succession. Does the company have good prospects for the coming years and decades? You should therefore seek advice from industry experts and take a close look at the company’s financials, whether historical or projected.
4. Innovation
Every company needs a unique selling proposition and innovative products or services. If the latter are lacking, it can take a long time to develop them. These investments in product development are, not least, costly. This is something you should definitely keep in mind when acquiring a company. Developing innovative products requires both fast and efficient work processes as well as a resilient corporate culture. You should examine these on a random basis and factor the results into your calculation of the purchase price.
5. From the Building to the Employees to the IT Infrastructure
A company is multifaceted. Therefore, depending on the industry, you should thoroughly assess the condition of the buildings, the interior design, and—above all—the IT infrastructure and the employees. An expert appraiser is often helpful, especially when evaluating the structural integrity of the buildings. If you are not familiar with IT, it is also necessary to consult an expert in this area. Modern IT, in particular, is essential to the company’s future viability. Last but not least, you should speak with as many managers as possible, as well as non-managerial employees. Determine whether they need further training, and assess whether the staff is up to date with the latest technical developments.
6. Existing Contracts
In many areas, a company is inextricably linked to the law—for example, in lease agreements, supply contracts, or employment contracts. When you acquire a small-to-medium-sized business, you also assume ownership of its existing contracts. This means you must have thoroughly reviewed the legal documents beforehand and determined that they pose no issues. Here, too, the same rule applies: If you lack sufficient knowledge in this area, you should seek legal counsel. Be sure to note when contracts can be terminated or when they expire, and, if necessary, exercise any option to amend or terminate them. You should examine employment contracts and the managing director’s contract with particular care, not least because of potentially high pension obligations.
7. Negotiate the Purchase Price
At the end of the day, after conducting many rational assessments, your gut feeling should be the deciding factor. Only if you fully support the business model and fundamentally identify with the company should you enter into concrete negotiations for the business acquisition. The buyer must first decide whether the transaction should be carried out as a so-called share deal or an asset deal. In a share deal, the buyer acquires the company’s shares. In an asset deal, the buyer purchases the assets owned by the company and assumes all economic assets—such as production facilities, land, buildings, equipment, inventory, and patents—as well as all of the company’s contracts and liabilities.
In general, negotiating the purchase price requires strong negotiation skills and a thorough understanding of the company. It’s also important to consider that the seller is often handing over their life’s work to someone else. Given this complex situation, it may make sense to retain the seller as an independent consultant for a while.
